Study of economics 

·      Study of optimum allocation of limited resources to satisfy our unlimited wants

1. Optimum allocation
2. Limited resources
3. Unlimited wants (happiness, profit, revenue)

leads to Opportunity Cost

Graphical Analysis:  Budget Line (y-intercept and slope)

Algebraic Analysis:  

Budget = (Pa)(A) + (Po)(O)

y-intercept:  (Budget/Po)

slope:  -Pa/Po

• Value of your next best alternative you must give up 
• slope of a budget line 
• trade off

utils to measure happiness

Utility level curves

In order to keep the same trend of U, trade off between A & O

decisions based on margins, not total

MR = Δ Revenue / Δ Output

MC = Δ Cost / Δ Output

The rate at which we trade off apples & oranges at the same level of happiness

1. Incentive
2. Value Creation
3. Changing Preference

• Make budget line flatter - changing opportunity cost
• examples:  employee evaluation, pay system, recognition
• Another example:  reduce opportunity cost between sales commission and honesty; honesty is cheaper to consume for the employee (relatively inexpensive)

• value = what you are willing to pay, willingness goes high - value increases
• determine what employee is willing to pay (typically intangible) then provide it at no cost
• Examples:  working environment, flexibility

Stable Market

When S = D, thus Qs = Qd

Demand Expansion:  demand curve shifts to the right (at every level of price, consumer buys more)

Supply Expansion:  supply curve shifts to the right (at every level of price, seller wants to sell more)

When demand increases, P and Q increase

When demand decreases, P and Q decrease

When supply increases, P decreases and Q increases

When supply decreases, P increases and Q decreases

When D & S increase, Q increases, P?

When D & S decrease, Q decreases, P?

When S increases and D decreases, P decreases, Q?

When S decreases and D increases, P increases, Q?

Sales Volume = a (baseline) - 2P + 3 Pcomp + 1P..+4Online+...

Demand Equation:  Q = a - 2P

Inverse Demand Equation:  P= a/2 - 1/2 x Q (used to draw demand curve)

How sensitive is sales volume to each variable

ε = %ΔQ / %ΔP

ε =((Q2-Q1)/Q1)/((P2-P1)/P1)

ε = (ΔQ / ΔP) x (P/Q) = slope of demand eq. x (P/Q)

or 1/(slope of inverse demand eq.) x (P/Q)

ε = - 2/5 means that a 1% increase in price leads to 2/5% decrease in sales

ε > 0 ---- Substitutes

ε < 0 ---- Complements

0 to <-1 implies Inelastic

-1 is Unit Elastic

 Less than -1 implies Elastic

Price elasticity is always a negative #

In elastic condition, increase P, reduce Q, improve Rev

∏ = Revenue - Cost

∏ = (P - AC) x Q

Total Cost = Fixed Cost + Variable Cost

Average Cost (AC) = TC / Q

MR = MC

MR > MC --- Q goes up (produce more - time to expand)

MR < MC ---- Q goes down - (Produce less)

1. Perfectly competitive market (baseline market structure)
2. Imperfectly competitive market:
• Monopoly
• Monopolistically competitive
• Oligopoly

1. Many buyers
2. Many sellers
3. Homogeneous goods/services
4. Complete Information/Symmetric Information
5. Easy entry/exit

Producer = Market

MR has slope twice greater than slope of D

Supply curve is producer's MR

Price is always set at demand curve not supply curve

= Monopoly + Perfectly Competitive

-  Goods not homegeneous through differentiation 

1. Entry Barrier (lobby, patents, M&A, supply)
2. Supply
3. Buyer
4. Substitution
5. Rivalry

1. Simple Pricing - demand known and homogeneous
• Single Pricing (MR = MC)
• Multiple Pricing:
1. Bulk (Block) Pricing
2. Two Part Tariff (membership)
2. Complex Pricing - demand known and heterogeneous
1. Personalized (1st degree)
2. Group (3rd degree)
3. Menu (2nd degree)

Used when demand is known and demand is homogeneous

Used for high ticket items

Used for product/service that

• Consumers use frequently
• Not so durable
• Replace frequently

different with each customer

want to reach the highest point of demand

can identify what group a customer falls into

once identified - use pre-defined price for the group

with group pricing there is usually a slight differentiation on the product

can't identify the customer

set menu prices such that each customer selects a price in the menu themselves